Treasuries Stare Over Negative Rates Abyss After Fed’s Bank Move

NEW YORK (Capital Markets in Africa) — Negative yields in the $17 trillion Treasury market is a step closer to reality after the Federal Reserve eased banking capital requirements.

The move by the Fed allows banks to take on more leverage so they can absorb a lack of liquidity for Treasuries, following a turbulent few weeks. Two-year yields touched the lowest level since 2013 after the announcement, and are hovering just over 20 basis points above 0%. A bigger-than-expected surge in U.S. jobless claims data Thursday also helped underpin investor appetite for Treasuries and keep yields in check.

“It is adding one more stone to the edifice,” Antoine Bouvet, senior rates strategist at ING Groep NV, said about the Federal Reserve change. “With no end in sight for the economic damage of the epidemic, this is one of the best risk-reward trades out there,” he said, referring to holding two-year Treasuries.

Over $10 trillion of investment-grade bonds have negative yields globally, with Treasuries so far providing a notable exception. In Germany, the entire yield curve dipped below 0% this year, meaning that investors who intend to hold the country’s bonds to maturity may make a loss.

U.S. two-year yields were up one basis point on the day at 0.22% as of 8:52 a.m. in New York, while the 10-year rate was steady around 0.58%.

The number of Americans applying for unemployment benefits more than doubled to a second straight record, highlighting the devastating economic impact of the coronavirus as shutdowns widened across the country. A total of 6.65 million people filed jobless claims in the week ended March 28, according to Labor Department figures released Thursday.

The Fed temporarily relaxed the so-called leverage ratio Wednesday, meaning the biggest banks no longer have to add Treasuries and reserves into the basket of assets they’re required to maintain capital for — significantly reducing capital requirements. The Fed said it made the decision because “liquidity conditions in Treasury markets have deteriorated rapidly.”

“Two-year yields hitting zero isn’t a massive stretch especially if equities start to register new lows,” said John Davies, a U.S. interest-rate strategist at Standard Chartered Plc. This “makes it more likely.

Source: Bloomberg Business News